Liam Dann: Inflation blame game highlights silly political bias


We have high inflation in New Zealand now and a lot of people seem to think Prime Minister Jacinda Ardern is blame for this.

Coincidentally, the UK also has inflation now and a lot of people over there seem to think Prime Minister Boris Johnson is to blame.

The UK joined the inflation club this week with news that the consumer price index had shown an annual increase of 4.2 per cent in September – the highest pace in more than a decade.

In New Zealand, inflation is now running at 4.9 per cent.

The key difference is that over there it is those on the left blaming the government, while here it has been those on the right.

Of course, it’s not really a coincidence.

There’s high inflation everywhere now. It’s bigger than Boris Johnson and it is certainly outside the control of Jacinda Ardern.

But the contrasting political arguments highlight the myopic, tribal views that still underpin a lot of economic commentary.

When a problem is global it makes no sense to apportion blame down local party political lines.

That doesn’t stop people.

Inflation creates problems for governments because it hits voters directly in the pocket.

And the average voter pays a lot more attention to their grocery bill than they do to international financial news.

So inflation is bad news for Labour here, it’s bad news for the Tories there.

It’s bad news for US President Joe Biden.

Inflation is probably even bad news for President of the People’s Republic of China Xi Jinping – although funnily enough no one in China seems to be blaming him, at least not publically.

It’s particularly bad news for Australian Prime Minister Scott Morrison, even though the annual rate there is still only 3.8 per cent.

That’s because Morrison faces a Federal election next year.

Scheduled for next May, Australians will go to the polls at roughly the same time most economists see inflation peaking around the world.

Other world leaders have time up their sleeves for pandemic supply issues to unwind and central bank policies to work their magic.

And in Australia, the central bank seems oddly reluctant to ride to Morrison’s rescue and head inflation off at the pass with higher interest rates.

Things are different in New Zealand.

We take inflation more seriously here and expect our central bank to lean hard against it.

The Reserve Bank (RBNZ) will almost certainly deliver its second rate hike in a row next week – putting it well ahead of the rest of the world in its policy response to high inflation.

RBNZ Governor Adrian Orr cops a lot of flack from the most conservative segment of our financial community for his progressive attitude to Treaty of Waitangi and climate change issues.

Some critics seek to conflate those issues with monetary policy, implying that the Reserve Bank is more radical in this area than it actually is.

When it comes to the RBNZ’s core business, Orr and his team remain firmly orthodox in their thinking.

It’s important to place their actions in a global context because there are limits to how far a small nation like New Zealand can stray from the likes of the US Federal Reserve.

Take a look at what’s happening in Turkey, where the central bank has decided – under strong political pressure – to cut rates despite high inflation.

The Turkish lira has been in free-fall the country now faces a currency crisis.

So yes, the RBNZ has been a party to low interest rate policies that have led to the build-up of asset prices inflation and, now, consumer price inflation.

We have printed money to pay for our Covid response.

In short, we’ve followed global trends. We did what was required to head off recession and deflation, but always more conservatively than larger nations. We were the last to print money, the first to stop.

Now we’re the first to start hiking rates.

There is a tendency of those who suffered through the inflationary era of the 1970s and 80s to worry a lot about inflation becoming embedded in the economy.

There is a risk of succumbing to nostalgic panic, the kind of cultural blindness that makes old people like me think pop music is no good anymore.

I don’t think current levels of inflation will last. Although that doesn’t mean I think they aren’t a problem.

What’s annoying is watching it all become another polarised, politically tribal debate.

Those with a view on inflation are supposed to fall into one of two camps – structural or transitory.

It’s a silly divide because, as with everything in the real world, more than two things can be true.

Inflation is always transitory. Economies don’t stand still.

The inflation of the 1970s was transitory, it just took 15 years to pass.

It did far more damage than was needed because it wasn’t properly addressed for several years.

Meanwhile, just six months of very high inflation tied entirely to transitory events – like the pandemic supply chain issues – might still be enough to spark the next global financial crisis.

Covid complications have been the trigger for inflation after years of loose monetary policy failed to kick start it.

The log-jam at ports around the world and the production backlog in factories is clearly an exceptional phenomenon.

Whether it is sooner or later, its resolution will be a powerful deflationary force.

New Zealand, as always, needs to maintain a balanced position and brace for shocks in both directions.

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